Transcript of Question & Answer Session Mortgage Arrears

Oh good. Thank you. So Guy, we might move to you and talk a little bit about monetary policy. So with an outlook of lower interest rates into the longer term, do you feel the impact of monetary policy on the economy is diminishing? Do you believe that this is compounded by the way that the banks pass on the RBA interest rate cuts?

No and no would be the answer to that question. So, despite many claims to the contrary, monetary policy I believe is still effective. It's possible it's slightly less effective than in the past, but it's absolutely still effective. We have seen its effect through the exchange rate work about as well as it ever has. Its effect on the household cash flows is, as best as we can tell, working about as effectively as it ever has. So the fact that households haven't adjusted their repayments down in the months immediately following interest rate reductions, that's been true for the better part of a decade, but still, over the course of time, households do reduce their interest payments. The fact they haven't done it in month one after the banks passed it on six weeks after we reduced the cash rate, which is also what normally happens, isn't any evidence of ineffectiveness. It's something we're very much mindful of, but on the evidence we have, and we have a reasonable amount of evidence, we don't see anything different to what's happened in the past in terms of household behaviour in responding to low interest rates. It's probably one of the factors contributing to house prices, so that channel seems to be working about as much as it ever does.

Then there is this other sector of the economy which borrows money, which is called the corporate sector, which is often ignored in this discussion. While it may not necessarily generate an increased investment response, if you think about the small business sector, they also are seeing improved cashflow through lower interest rates. So through all those channels, we don't see any reason to suspect it's not working as effectively as it has in the past.

One caveat to that is clearly it's having an impact on those who rely on interest on their deposits for their incomes. That's always obviously been true as we lower interest rates, but as interest rates get to lower levels, that does seem to be potentially changing the behaviour. That's something we are pretty much looking into at the moment.

Just to put in context the effect. We've reduced the cash rate by 75 basis points. So while the banks haven't passed on all of that to the standard variable rate, over the course of time, what we have seen is that people have refinanced to lower rates. So that by now I think we're up to around 60 of the 75 basis points is reflected in the decline in average mortgage rates. By the end of the year, it may be getting somewhere closer to 65. So that's because people are recognising because there was a gap between the rate on the front book and the rate on the back book, people are waking up to that gradually and refinancing to cheaper rates. So over the course of time, the pass through of the cash rate to mortgage rates might not be much different at all than it's been in the past.

Thank you. So this will be my last question and then I will open up so be ready. So, Guy, staying with the theme of interest rates and a low interest rate environment, what are some of the risks that you can see arising from a low interest rate environment? You talked a little bit before. And what would you need to see in the housing market to be concerned?

Okay, that's two separate, slightly separate issues. What I mentioned earlier, obviously there are a number of people out there who rely on deposit income, so if interest rates are lower for longer and they are unwilling or unable to switch to any other asset or even run down that asset, then that's a clear issue for them. One thing I'm not particularly worried about in a low interest rate environment is its effect on bank interest margins. I'm not sure whether some people have their incentive to talk their own book to preserve their interest margins and complaining about low interest rate environments. But one thing, I mentioned it in my talk, I think bank interest margins in this country are actually reasonably healthy, they are absolutely healthy. Secondly, the low interest rate environment, has an impact on asset quality as well, so it's not just about interest margins. It has an impact on asset quality, which is a first order impact on the profitability of financial institutions and I think that sometimes seems to get missed in the discussion. We are setting policy to ensure a strong Australian economy. A strong Australian economy, very much benefits the asset quality of those who are lending against those assets and I think that very much needs to be kept in mind.

Related to that, on the housing market side, at the moment house prices are rising but credit growth isn't. As I mentioned again earlier in my speech, we are much more confident mostly as a result of a lot of the stuff that APRA's done about the overall quality of the credit, which is out there. And so given that, for me personally, certainly we're a long way from needing to worry about that at the moment given what we're seeing out there. There is some level of excess which would be a concern, but it mostly comes down to are we confident that the lending standards are being maintained and as long as that's the case, then I think that very much dilutes that risk.

Thank you. Further questions from the audience?

Guy Debelle, you said that interest rate reductions are just as effective now as they have been in the past, but the retail sector and construction sector are both contracting as we speak. So can you explain why you think interest rate reductions are still as powerful?

One thing, this has been true forever and a day, monetary policy works with long and variable lags. So the first interest rate reduction is in June. Here we are in November and the most recent data we have is, at best, for October. So not much time has gone past yet. So I do think it's a question of, give it a little bit more time. The construction sector is contracting, as you said, it's been falling because we've been at an extremely high level. I gave a talk on this a couple of weeks back. I have reasonable confidence that the construction sector will be picking up by probably, towards the end of next year because they also have long and variable lags and having built a lot, now they are building less and once demand exceeds supply again, which I suspect is going to be some time over the course of next year, then you'll see that come back.

So it is a question of instantaneous gratification. As much as it's desirable and very much desired in this day and age, particularly by the media, unfortunately monetary policy does take a little while to get through and so it is a question of just having to wait a bit of time to see how that plays out.

Thank you. There's a gentleman over here if we can get a mic.

Thank you. Question for Guy. Guy, look, I hear what you're talking about on interest rates, but taking a slightly larger macro perspective globally, I'm an asset manager, we see negative mortgage rates in Denmark. We see a very large percentage of sovereign debt negative. We are not talking about a normal environment. It's probably unprecedented. Where do you see this all ends up because clearly, we're all running assets in different shapes and sizes, whether it be mortgages, houses, are we talking deflationary? What are we actually talking here?

So Phil talked about this last month, I think. So there's some big global forces going on around out there. So global savings is high, global investment is not that high and when savings are high and investment is not that high, then interest rates are going to be low, and that's a global story, as you say. So to some extent, how that plays out going forward is how those two things evolve. So we have an ageing global population at the moment. That's putting downward pressure on interest rates. We have a number of factors which aren't contributing it to being the most conducive investment environment you've ever seen around at the moment. There's clearly a lot of uncertainty around the trade side of things, which is having a first order impact on investment right around the world. Maybe a bit less here, but certainly right around the world.

The demographics force is here to stay for a while and it's persistent, but on the investment front, some resolution of that uncertainty and the opening up of other opportunities does at least provide some chance that actually investment picks up. But in the end, the sort of global interest rates that we see are very much I think, an outcome of those very big secular forces which are affecting both savings and investment and while ever they persist and that's the environment we're potentially going to be in for a while.

Can we just have an addendum? Clearly we're in a different environment with Fintech technology. How does that sort of get absorbed into your thinking? Because again, it's a brand new, we're getting more efficient in a lot of ways. Less jobs. Are there going to be enough jobs to go around?

So, I mean that question has been around for a few thousand years and it turns out, and as of today, the answer is still yes and maybe one day it won't be. But the concerns about technology displacing jobs, I mean obviously the Luddites were a bit worried about that, but they all have jobs today, or their descendants do at least. I don't think any of them are still around. But my point being is that that concern has been with us for a long, long time. And maybe one day it will be an issue. I mean there's very much an issue in the adjustment to technological change, but that's been with us for a very long time as well.

Like I said, technological change has been with us forever. I mean literally. And it's not clear that today is necessarily any different than it's been in the past. Maybe it is, but it's not obvious to me that it necessarily is going to have any differential impact than it's had in the past. It is something we pay a lot of attention to, but one of the big concerns out there and another reason why people are going to argue that interest rates are low, you know, Larry Summers very much pushes the secular stagnation view. That secular stagnation is somewhat inconsistent with a large amount of technological change.

Thank you, Karen. I think we've got time for one last question. Up the back.

Yeah. I'd like to ask a different sort of question, which is about if banking is the gearbox for the economy, right? Without banking we have no economy. A critical component is not only credit liquidity, but it's the payment system and we're going through a major transformation now into digital payment systems. We're going into a world where we might not have cash anymore, currency and coin. But we seem to have unreliable systems in many of the banks and across the industry. And I'm curious from a regulator's point of view, what you're going to do to make sure that if I do use electronic payments, it will be accurate, they will be secure, and they will be on time?

The Payment System Board very much cares about all the issues you've just raised. John mentioned the NPP. I mean that was an enhancement to the core functioning of the payment system to basically keep it current and deliver a much better service to the community of Australia right across the board. But also, very much built with the idea of resiliency being very much at the forefront in its design. So we, the Reserve Bank, run the core of that payments infrastructure and we invest a lot in maintaining that resiliency in particular, as mentioned, in terms of its resiliency on the cyber front. So, but if it's operational resiliency, we have to maintain that system 24/7, 365 days a year now. So we have to make sure that it's operationally resilient. But also, as I said, very much resilient on the cyber front, which is an increasing challenge, a major challenge in this day and age.

I mean, I know all of the financial institutions in this world are very much aware of that, but that's a major issue if you're us. So unlike a bank, we can't obviously put our system down between 1:00am and 5:00am on a Sunday morning. Our allowable outage a year is 20 minutes. So that doesn't give us much time. So that is very much a challenge, which we invest a hell of a lot of time and effort into making sure that, at least the core part of the infrastructure, remains resilient. And then as was said, the overlay is that APRA is very much looking at the resiliency of all the financial institutions that tap into that core infrastructure.

Thank you. So that wraps up the panel discussion for today. So please join me in thanking Guy, Karen and John for their time and comments today.